H&R Block's Refund Anticipation Loan: Perilous Profits at the Bottom of the Pyramid

Some firms comprehend the enormous potential that exists for providing services to the growing low income segment. Operating in the low-income market has numerous complications, such as designing an efficient distribution and servicing system, offering simple and “easy to consume” products, and training a sales force. In addition, vendors of products for the poor often must enter into a contentious, long-standing and irresolvable debate about appropriate levels of profit and consumer protection. Regardless of the merits of these debates, firms can find themselves bedeviled by complicated interactions with non-customers, including consumer advocates, the press, courts and regulators. The experiences of H&R Block, a $4.2 billion income tax preparation and financial services firm headquartered in Kansas City, Missouri, illustrate some of these costs. Block sells a highly profitable “Refund Anticipation Loan” (RAL) product to clients opting to pay a fee to receive their tax refund in just one day. RAL consumers are typically from low income households under considerable financial stress. While RALs may serve a specific need and are highly demanded (Block sold over 4 million in 2004), Block faces pressure from consumer advocates to lower the pricing of the product or to exit. This situation illustrates a number of hard questions with broad application: How much profit is “too much”? Who is the arbiter of such a decision? To the extent that “consumer advocacy” is costly, what are the implications for firm entry and exit into the low-income market and for the prices of goods and services sold to the poor? If large, profitable and visible firms are targeted for advocacy activities, what are the implications for consumers? How should firms seeking to sell goods and services to the poor behave?